Law firm Hogan Lovells, expects M&A activity for 2024 to be largely subdued in SA due to global economic headwinds, geopolitical uncertainty, structural constraints, and regulatory and policy uncertainty.
Hogan Lovells, one of the world’s largest law firms in terms of revenue, specialises in corporate and commercial law.
According to Chris Green, managing partner at Hogan Lovells, M&A activity in the country fell sharply in 2023 relative to the two preceding years, in line with global trends. The factors driving this included high inflation and high interest rates, as well as the geopolitical uncertainty in Europe and the Middle East.
On the local front, structural constraints, notably load-shedding and logistics infrastructure shortcomings, have deterred and undermined investment activity. In certain sectors, regulatory and policy uncertainty continue to be a challenge.
Green says this trend is expected to continue throughout the year “with significant M&A activity in SA likely to be more muted than that experienced immediately after the Covid-19 pandemic. The factors mentioned continue to affect activity and show no signs of abating in the short term.”
Over the past two decades, businesses have been notorious for burning through huge cash piles as they develop and scale their operations. This was particularly true in sectors such as technology. The most famous example is Jeff Bezos’ e-commerce business, Amazon, which went years without turning a profit.
But rising interest rates, which makes the cost of capital higher, together with a more bearish sentiment globally, have shifted investors’ mindsets to seeking profitable businesses to back. This has resulted in a more cautious outlook around expansion.
“SA and several other global economies are heading into an uncertain election cycle. For the first time since the first democratic elections in 1994, the results of the coming election are by no means certain. This alone will result in investors exercising caution, at least in the first half of the year.”
This is not to say that there are no deals on the table.
French broadcaster Canal+’s bid to take over JSE-listed entertainment group MultiChoice has the potential to be one of the year’s largest transactions.
In mining, Australia’s BHP has set out its intention to take over rival Anglo American through a £31bn offer which was recently rejected by Anglo’s board as being too low.
Smaller deals
The expectation is that smaller deals will be the order of the day.
“We can expect SA corporates to pursue smaller add-on acquisitions to bolster growth and diversification. These are likely to take the form of both domestic acquisitions and foreign acquisitions, with corporates pursuing opportunities to expand in higher-growth markets across the African continent and to hedge their risk in more developed markets in Europe and the US,” Green said.
Efforts being made in the regulatory environment did, however, need to be acknowledged.
These have included changes to anti-money-laundering legislation, which are intended to facilitate SA’s removal from the Financial Action Task Force greylist. Amendments to the SA Companies Act have also been tabled with the intention of eliminating several uncertainties and structuring challenges that have arisen in company law since the act was introduced, and providing greater transaction certainty.
Additionally, the JSE — which is fighting a spate of delisting — “has also taken steps to ease the regulatory and compliance burden placed on companies which intend to list, or are listed, on the exchange”, Green said.
Earlier in the month, the exchange announced plans to split its main board into two as part of the plan to check the flight of small-cap companies from the board.
Green said the energy sector had been one of the leading lights in foreign and domestic investment over the past two years, owing to simplification around legislation, particularly with respect to renewable energy projects.
In mining, greater investment activity was expected if the government could conclude and implement a globally competitive cadastral system, to help with processing of mining rights, among a host of other issues in the sector.
Logistics was expected to see good activity, driven by the need to revamp the country’s ports, while digital infrastructure such as data centres and fibre were expected to continue attracting big cheques, he said.
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